- Cryptocurrency is very volatile – it has its own charm and risks.
- Fluctuations caused by supply and demand allow traders to take advantage of them.
- Experts are ambivalent about investing in cryptocurrency. Because cryptocurrency is a highly speculative investment with the potential for strong price fluctuations.
- To prevent fraud, each transaction is verified using one of two main verification methods: proof of work or proof of participation.
What is cryptocurrency
Cryptocurrency is no longer a mystery… keep reading.
Cryptocurrency is a decentralized digital currency based on blockchain technology. You’re probably familiar with the most popular cryptocurrencies, Bitcoin and Ethereum, but there are over 5,000 different cryptocurrencies in circulation. The distinguishing feature of cryptocurrencies is that they are not issued by any central authority, which theoretically makes them immune from government interference or manipulation.
Cryptocurrencies can be mined or purchased on cryptocurrency exchanges. With the rapid growth in the value of cryptocurrencies, they are becoming popular as trading tools. Cryptocurrencies are also used to a limited extent for cross-border transfers.
People can use cryptocurrencies both to buy ordinary goods and services and to invest in the same way as in other assets such as stocks or precious metals. Although cryptocurrency is a new and exciting asset class, buying it can be risky because traders need to do enough research to fully understand how each system works. A few words about the Blockchain…
… As this is the most misunderstood part of cryptocurrencies.
Blockchain is an open distributed ledger that records transactions in code. It’s a bit like a checkbook distributed on countless computers around the world. Transactions are recorded in “blocks”, which are then combined into a “chain” of previous cryptocurrency transactions. Thanks to the blockchain, everyone who uses cryptocurrency has their own copy of this book to create a single record of transactions. The software records each new transaction as it occurs, and each copy of the blockchain is updated simultaneously with the new information, keeping all records identical and accurate.
To prevent fraud, each transaction is verified using one of two main verification methods: proof of work or proof of participation.
- Proof of work – Each participating computer – a “miner” – solves a mathematical puzzle that helps validate a group of transactions, called a block, and then adds them to the blockchain. The first computer to do so successfully is rewarded with a small amount of cryptocurrency for its efforts.
- Proof of Stake – To reduce the amount of energy required to verify transactions, some cryptocurrencies use a proof-of-stake method. With a proof of stake, the number of transactions each person can verify is limited to the amount of cryptocurrency they are willing to “invest” or temporarily lock into a shared vault to be able to participate in the process. Anyone who bets on cryptocurrencies has the right to confirm transactions, but the chances of you being selected to do so increase with the amount you deposit.
What is Cryptocurrency Trading
Investors like to trade cryptocurrencies because they are very volatile and if a trader is able to anticipate the market, trading cryptocurrencies can bring much higher returns than traditional investments.
Cryptocurrency trading is the exchange of digital currency between traders. Fluctuations caused by supply and demand allow traders to take advantage of them. Cryptocurrency trading is both risky and rewarding due to its volatile nature.
Note: Risk can be reduced by hedging or diversification.
Like any financial market, the cryptocurrency market is subject to fluctuations in supply and demand.
- When demand exceeds supply, the price of an asset rises.
- When supply exceeds demand, the price of a cryptocurrency tends to fall.
Cryptocurrency trading can be done through a CFD trading account or buy and sell base coins through an exchange.
- CFD trading on cryptocurrencies allows traders to speculate on the price movements of cryptocurrencies without appropriating the underlying coins. Traders can opt for a long or short position, if they think a cryptocurrency will rise or fall in value. CFD trading on cryptocurrencies can be mined, which means that traders only have to deposit a small deposit, a margin, to get full exposure to the underlying market. Profit or loss is always calculated based on the total size of your position, so leverage will amplify both profits and losses.
- Whereas when traders buy cryptocurrencies through an exchange, they buy the coins themselves and will have to create an exchange account, set up the total value of the asset to open a position and store the cryptocurrency tokens in their own wallet until they are ready to sell. Exchanges bring their own learning curve; many exchanges also have limits on how much traders can deposit, while accounts can be very expensive to maintain.
Cryptocurrency trading, as you can see, is quite tricky, from the point of view of unpredictability, but it also has many advantages. Let’s take a look at the pros and cons of cryptocurrency trading, summarize the yeses and no’s. Advantages and disadvantages of cryptocurrency